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Debit and credit cards are nowmore popular than cheques,but direct debits lag

The Australian Payments System

/ R e s e rve Bank of Australia

the australian payments sy s t e m

The Australian payments system is a broad

term which describes the payment instruments

by which individual payments are made or funds

transferred, ranging from cash to sophisticated

mechanisms on the Internet; payments clearing

arrangements by which financial institutions

exchange the resulting instructions; and

payments settlement arrangements for the final

transfer of value between financial institutions.

The Payments System Board has undertaken

a detailed review of the Australian payments

system, looking at how its characteristics have

changed over the past decade and, where

possible, “benchmarking” it against other

countries. This review has been the basis for the

Board’s preliminary assessment of the efficiency

and safety of the payments system.

The payments system covers two distinct

types of payments: retail (which includes

commercial) and high-value. Retail payments

account for almost all payments by number but

only a small part of total values exchanged;

they are where efficiency gains are most likely

to be found. High-value payments are small in

number but account for most of the value of

payments exchanged; they are critical to the

stability of the payments system.

Australia: Payments cleared 1998

r e ta i l h i g h - va l u e

P u r p o s e Retail and Foreign exchange,c o m m e r c i a l money marketp a y m e n t s trades, corporate

p a y m e n t s

M e c h a n i s m Cash, cheques, Real-timedirect credits gross settlementand debits,cards

D a i l y $20 billion $100 billiont u r n o v e r *

Average daily 8 1/2 million 16 000n u m b e r *

*Excluding cash

R e tail pay m e n t s

C as h

The Australian propensity to use cash has not

declined. Although flow data on the number and

value of cash transactions are not available,

stock data suggest that cash is probably still the

most important retail payment instrument. The

stock of currency (notes and coins in the hands

of the non-bank public) can be compared, on a

per capita basis, with expenditure or shown as

a ratio to GDP. Either way, the use of cash

appears to be just as widespread in the late

1990s as it was in the 1980s.

Automated teller machine (ATM) withdrawals

provide another proxy for cash transactions.

This does not measure the total value of cash

transactions because a single currency note can

be used many times before being returned to a

financial institution, but it does give a lower

bound. Annual withdrawals from ATMs are

around $60 billion, exceeding the value of

payments made by electronic funds transfer at

point-of-sale (EFTPOS) and credit cards

combined, indicating that cash still outstrips

these payment instruments.

The continued importance of cash is not

unique to Australia. Indeed, cash is even more

popular in some other countries, and Australia

is only in the middle of the field when currency

to GDP ratios are compared.

N o n - c ash retail pay m e n t s

Although the use of cash remains well

entrenched, non-cash payment instruments are

becoming increasingly important in the retail

payments system in Australia. Australians have

always been keen users of cheques. The number

of cheques each person writes annually has

risen slightly over the 1990s, but cheques as a

share of non-cash payments have declined

substantially (from 50 to 36 per cent over the four

years to 1998) in the face of the growing pop-

ularity of other means of payment, particularly

debit and credit cards; together, these cards are

now more frequently used than cheques.

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Payments System Board

Australia - Currency to GDP

per cent

currency to GDP

1 9 9 8



In the retail payments area, industrial

countries divide roughly into two categories -

those that use cheques extensively and those

that use credit transfers (“giro payments”).

Australia falls into the first category, along with

the United States, the United Kingdom, Canada

and France. Most of the European countries and

Japan are in the second. In all the high-cheque-

N u m b e r o f n o n–c a s h r e ta i l pay m e n t s

per cent, 1998

C h e q u e s 3 6

E F T P O S 2 2

Direct entry credits 1 9

Credit cards 1 7

Direct entry debits 6

1 0 0

Number of card payments per capita Number of cheque payments per capita

1990 vs 1997

use countries, the share of payments by cheque

has declined and in some - namely France, the

United Kingdom and Canada - the number of

cheque payments per capita has also declined.

In contrast, the number of cheque payments

per capita in Australia and the United States has

been on the rise.

Direct credits to customers’ accounts at

financial institutions are widely used in

Australia for recurring bulk payments of

salaries, pensions, interest and dividends,

health fund refunds and social security pay-

ments. Usage has grown steadily over the 1990s,

as has been the case in all G10 countries. Never-

theless, Australia is not a high user of direct

credits by international standards; in a number

of European countries, direct credits are also

heavily used for single payments by individuals

to other individuals and companies through

giro systems.

Direct debits have always been a relatively

little-used payment instrument in Australia.

Though a convenient and relatively low-cost

way of meeting recurring bills, the number of

direct debit transactions per capita has actually

fallen in Australia over the past decade. This is

in sharp contrast to countries with payment

patterns comparable to Australia and, in fact, to

the experience of every G10 country.

In contrast to their reluctance on direct

debits, Australians have taken to card payments

with enthusiasm. At the beginning of the 1990s,

EFTPOS and credit cards together accounted for

around 15 per cent of non-cash payments but

that figure has now risen to almost 40 per cent.

In summary, the key features of the Australian

payments system are that:

• despite a decline in relative importance,

cheques remain the most frequently used

non-cash payment instrument; but

• with their strong growth over recent years,

debit and credit cards together are now

more important than cheques; and

• direct debits are the least used of payment

instruments and Australia lags well behind

other countries.

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Number of direct credit payments per capita

1990 vs 1997

Number of direct debit payments per capita

1990 vs 1997



Efficiency of the retail

payments system

The Financial System Inquiry concluded that

there was considerable scope to increase

efficiency in the Australian payments system,

that is, to meet the needs of those using the

payments system with fewer resources. On the

basis of its preliminary stocktake, the Board

generally concurs with that view but it is mindful

that definitive conclusions are some way off.

An assessment of efficiency in the payments

system is not a simple task. As a minimum,

reliable data are needed on the costs of prod-

ucing payment services, to enable a meaningful

benchmarking of costs with other countries.

Such data are not available in Australia.

In addition to costs, there are two other

important dimensions of efficiency. The first is

performance. Minimising production costs does

not, of itself, maximise efficiency if it is at the

expense of performance. Faster processing of

transactions, increased accessibility, more

convenience and improved reliability and

control are all elements of a payment system

which can increase efficiency, even at higher

cost. As discussed below, recent improvements

to the cheque-clearing system have provided

important efficiency gains to consumers and

small business, despite the cost of the project

to financial institutions. Quality of service

needs to be taken into account in any bench-

marking exercise. The second dimension is

pricing. A payment system will not be efficient

unless the relative costs of payment instruments

are reflected in their relative prices, so that

consumers have appropriate signals on which

to base their decisions.

The data needed to measure efficiency rigor-

ously are extensive. The Board has commissioned

a comprehensive data collection from banks,

other financial institutions and payments

service providers, and preparations are well

under way. The information gathered will

provide a basis to benchmark the costs and

performance of the Australian payments system

against international best practice. It should

also shed light on some puzzles about the

pricing of payment instruments - particularly

cheques and cards - revealed in the Board’s

initial stocktake.

Overseas evidence suggests that paper-based

payment instruments such as cheques are more

expensive than electronic instruments and that

automated direct credits and debits are the least

costly payment method. If this ordering of costs

also applies in Australia, as would be expected,

it does not appear to be fully reflected in

pricing. Although interpretation is complicated

by fee-free transactions, banks in Australia tend

to impose a higher charge for over-the-counter

transactions than for others; cheque transactions

also usually attract a higher fee than electronic

transactions. In many cases, however, the fee

for an EFTPOS transaction is similar to that for

writing a cheque.

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Transaction fees – August 1999

anz colonial commonwealth national st.george westpac

state

Access State Basic Streamline National Everyday ClassicFlexible Account Account Flexi Account AccountOption Account

No. of free transactions 81 5 51 82 8 8

A c c o u n t - keeping fee $ 6 . 0 0 - $ 3 . 0 0 $ 4 . 0 0 $ 5 . 0 0 $ 5 . 0 0(per month)

OTC withdrawal $ 2 . 5 0 $ 2 . 0 0 $ 2 . 0 0 $ 2 . 0 0 $ 2 . 0 0 $ 2 . 0 0

Cheque $ 0 . 6 5 n . a . $ 0 . 6 0 $ 1 . 0 0 $ 0 . 5 0 $ 0 . 6 5

E F T P O S $ 0 . 4 0 $ 0 . 5 0 $ 0 . 4 0 $ 0 . 5 0 $ 0 . 5 0 $ 0 . 6 5

ATM withdrawal

– Own bank $ 0 . 6 5 $ 0 . 5 0 $ 0 . 6 0 $ 0 . 5 0 $ 0 . 5 0 $ 0 . 6 5

– Other bank $ 1 . 5 0 $ 1 . 5 0 $ 1 . 2 5 $ 1 . 2 5 $ 1 . 5 0 $ 1 . 2 5

Telephone transaction $ 0 . 4 0 $ 0 . 5 0 $ 0 . 4 0 - $ 0 . 2 0 $ 0 . 6 5

Bill payments $ 0 . 4 0 $ 0 . 5 0 $ 0 . 4 0 $ 0 . 3 0 $ 0 . 2 0 $ 0 . 6 5

1 Maximum of 2 over-the-counter2 Maximum of 4 over-the-counter and chequen.a. not applicable

Australians are relatively heavy users of

cheques, which are probably the most costly

instrument for retail payments. If other

payment methods could be substituted, the

resource costs of the payments system could be

considerably reduced. As a minimum, this

would require a charge on cheque usage which

reflected its relative cost; it would also require

the ready availability of acceptable alternatives

priced to reflect their costs.

Although already a mature product, credit

cards have grown in popularity over recent

years in Australia and other industrial

countries. Credit cards are being used for new

classes of payments, including theatre tickets,

mail order and, increasingly, utility bills. The

Internet is likely to provide another boost to

p o p u l a r i t y. Underlying this shift in payment

patterns seems to be the spread of loyalty and

other reward programs. These schemes can

have the effect of making the marginal cost of

each transaction to the customer negative.

However, the cost of the transactions to the

banks and the card companies is positive, and

merchants bear those costs directly through

merchant service fees (which are passed on to all

customers, not only those using credit cards).

The fees paid to credit card issuers appear to be

an important source of revenue funding loyalty

schemes. This pricing structure, encouraging as

it does the use of credit cards, may prove to be

impeding the efficient allocation of resources in

the retail payments system.

Loyalty schemes also appear to be having an

effect on the market for a close substitute,

namely, direct debits. Australia is falling well

behind comparable countries in the use of

direct debits for routine bill payments. Faced



with a choice of paying a utility bill with an

instrument that grants loyalty points and an

interest-free period (but which can be relatively

costly to provide), or one that requires a

willingness to give up a degree of control to

billers and financial institutions (but which is

relatively cheap to provide), Australian con-

sumers have responded rationally to inefficient

price signals and opted for the credit card

rather than the direct debit.

H i g h - value pay m e n t s

In June 1998, Australia introduced its real-

time gross settlement (RTGS) system for high-

value payments. Under this system, all high-

value payments are settled individually, as they

are made, using funds in institutions’ Exchange

Settlement (ES) accounts at the Reserve Bank.

Payments are “prefunded”, in that they are

made only if the paying institution has

sufficient funds in its ES account.

There are three high-value payment streams

which settle on an RTGS basis. The core system,

where the exchange of value takes place, is the

Reserve Bank Information and Transfer System

(RITS), an electronic depository and settlement

system for Commonwealth Government

securities (CGS), which also provides access to

ES accounts. The other two streams are

A u s t r a c l e a r, an electronic depository and

settlement system for other debt securities, and

the SWIFT Payment Delivery System (PDS), the

main vehicle for making payments which do not

have an associated securities transaction.

Overall, RTGS payments average around $100

billion each day and account for over 90 per

cent of the value of payments exchanged

between financial institutions in Australia.

RTGS transactions 1998/99 – daily av e r a g e

system value number

($ billion) (thousands)

CGS and money marke t R I T S 1 3 . 8 0 . 7t r a n s a c t i o n s

Other fixed-interest and A u s t r a c l e a r 2 1 . 3 2 . 6money market transactions

Foreign exchange, corporate SWIFT PDS 6 6 . 7 1 2 . 5transactions, etc

Number of credit card payments

per capita

/


Safety of the payments system

Australia’s RTGS system replaced a deferred

net settlement system under which interbank

obligations accumulated throughout the day

and were not settled until 9.00am the following

day. The RTGS system, in contrast, prevents the

build-up of unsettled obligations and has

sharply reduced interbank settlement exposures.

It has made the Australian payments system

much more robust.

The safety and stability of payment systems

have been a major preoccupation of central

banks over recent years. An initiative is under

way to codify the desirable features of payment

systems of systemic importance and to develop

a set of guiding principles and practices. This

work is being carried out by the Committee on

Payment and Settlement Systems at the Bank

for International Settlements, and the Reserve

Bank has been fully involved in the exercise.

The work is not yet finished, but five main

themes that are emerging from it - legal

underpinnings, risk control, timely settlement,

access and oversight - emphasise Australia’s

recent progress in improving the safety and

stability of its payments system.

As in most other countries, Australia’s

payments system arrangements grew up largely

as a matter of convenience and convention. But

closer inspection of the legal underpinnings by

the industry and the Reserve Bank revealed a

number of gaps and uncertainties. The main

concerns were that:

• transactions might be declared void under

a so-called “zero hour” ruling;

• payments netting arrangements might not

be enforceable; and

• banks might have to pay out on cheques

deposited with them, even if the bank on

which they were drawn was unable to

settle for them.

Two key pieces of legislation which came into

force last year - the Payment Systems and

Netting Act 1998 and amendments to the

Cheques Act 1986 - give the Payments System

Board a basis for dealing with these concerns.

The Board has taken advantage of this legislation

and its response is explained later in this Report.

Prior to the implementation of Australia’s

RTGS system, the payments system was subject

to unacceptably high levels of settlement risk.

Most participants could neither measure the

risk nor control it. Now, over 90 per cent of the

value of payments exchanged in Australia are

settled on an RTGS basis, eliminating settlement

risk for those payments. The Reserve Bank is

also working with the Australian Pa y m e n t s

Clearing Association to strengthen settlement

arrangements in those clearing streams which

continue to settle on a deferred net basis, by

ensuring that they will have the protections

afforded by the Payment Systems and Netting

Act 1998 and the Cheques Act 1986.



High-value transactions are now subject to

more timely settlement, that is, continuously

throughout each business day rather than at

9 . 00am the following day. This has moved

Australia from being well behind international best

practice to being unambiguously at best practice.

Survey data recently published by the Reserve

Bank show that the RTGS system has also made an

important contribution to reducing foreign

exchange settlement risk for the Australian dollar

leg of foreign exchange transactions.

Before the RTGS system, the access of many

banks to the high-value payments system was

through agency arrangements in the paper

clearing system, or through a high-value

electronic system operated by five of the largest

banks. This had the effect of concentrating risks

in a limited number of banks and making

smaller banks dependent on their commercial

relationships with their larger rivals. All banks

now have direct access to the various streams

which operate on an RTGS basis.

Finally, oversight of the Australian payments

system has been clarified and strengthened

through the introduction of the new regulatory

framework, with the Payments System Board at

its centre. There is no doubt about the Board’s

authority or its ability to initiate change where

this is deemed necessary.

Overall, the safety and stability of the

Australian payments system scores highly

against these broad principles. It would not

have done so, however, before the RTGS system

was introduced.

The Payments System Board acknowledges

that it inherited a payments system in robust

condition, but the agenda in this area is not

complete. At present, the Board is closely

following two issues which are fully engaging

the Reserve Bank. These are the preparations

for inclusion of the Australian dollar in the

proposed CLS Bank and the concerted effort

being made by participants at all levels to

ensure that the Australian payments system is

ready for the Year 2000. Both issues are discussed

in the next part of this Report.

Safety of Australia’s payments system

before july 1998 now

Legal underpinnings Significant gaps Identified gaps closed

Settlement risk High and uncontrolled Reduced by over 90 per cent

Timely settlement Next day Continuously (for high-valuep a y m e n t s )

A c c e s s Through agents (for many institutions) Direct (for high-value payments)

O v e r s i g h t I n f o r m a l S t a t u t o r y

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